Belaruskali v Uralkali: Between Politics and Criminality

On Monday, Belarusian authorities arrested the general director of Russian potash company Uralkali. Vladislav Baumgertner, who came to Minsk to negotiate with Prime Minster Mikhail Myasnikovich.

About a month ago, Uralkali stopped cooperation with...

On Monday, Belarusian authorities arrested the general director of Russian potash company Uralkali. Vladislav Baumgertner, who came to Minsk to negotiate with Prime Minster Mikhail Myasnikovich.

About a month ago, Uralkali stopped cooperation with Belaruskali and started selling potash at lower prices and taking away Belaruskali’s customers. By this action, Uralkali changed the situation on the global potash market and weakened the positions of Belaruskali, the national Belarusian potash company.

Belaruskali, meanwhile, is amongst the three biggest taxpayers to the state budget, so it is no wonder that Minsk resorted to radical measures and launched a wide-scale campaign against major Russian oligarch Suleiman Kerimov. Kerimov is the majority shareholder of Uralkali and its main decision-maker.

Moscow responded with measures which could create a new trade war between Belarus and Russia – by cutting oil shipments and threatening to reduce Belarusian food import. Minsk still insists the affair is primarily criminal. It demonstratively sent arrest warrants to Interpol and promised to capture Kerimov themselves.

A Five-Billion Dollar Bribe?

In 2005, state-owned Belaruskali and private Uralkali founded the Belarusian Potash Company to sell their products together. In this way they could control up to 40 percent of the global potash market. The partners influenced prices and reaped more profits as a result of their cooperation.

But then Uralkali changed hands and the new owner of Uralkali, Suleiman Kerimov, continued enhancing his business. In 2011, he bought the second Russian potash company, Silvinit. The next target was Belaruskali. Kerimov had to cut a deal with President Lukashenka.

Yet his efforts were futile. The Belarusian leader sometimes outrightly refused to sell Belaruskali and sometimes demanded a price of $30bn which Kerimov was not willing to pay. In October 2012, Alexander Lukashenka said, “some Russian oligarchs” had offered to pay him a bribe of $5bn if he agreed to sell the national potash company for $10bn. Most likely, this alleged proposal came from Kerimov.

Uralkali’s effective owner had a lot of opportunities to put pressure on Belarus. First, Uralkali could extract potash cheaper than its Belarusian counterpart. Second, Uralkali could put his people in key positions in the Belarusian Potash Company and take control over its trading personnel. This meant that Minsk had to believe what the Uralkali people said.

Belarus Strikes Back?

As a result, Kerimov could both negotiate with Lukashenka and gradually undermine Belaruskali’s stature in global markets. The Russian producer started to sell potash without the mediation of the Belarusian Potash Company (BKK). Last year, Uralkali sold only 20% of its produce through the Belarusian Potash Company.

Belarusian media published numerous examples of other abuses, as well. Thus, in July, Russian management annuled a contract between BKK and an Indian company which, according to Belarusian officials, caused $90m losses for Belaruskali. The Russian head manager of BKK Petrov redirected the ships to export Russian potash instead of Belarusian. Recently, Minsk revealed the story of a billion dollar loan taken by Uralkali and guaranteed by the BKK, i.e., potentially making the Belarusian government responsible for repayment if Uralkali itself failed to do it.

The Belarusian side itself was no vegetarian in this capitalist feeding frenzy, paying back in kind, only its potential to influence the situation were much smaller. Thus, while Uralkali single-handedly gave discounts to Chinese buyers, Belaruskali granted preferential conditions to Brazil. In December 2012, Lukashenka issued a presidential edict to the effect that Belaruskali and the Belarusian Potash Company no longer had a monopoly on exporting Belarusian potash.

The edict appears to be a proportional response to Uralkali’s policy to sell potash outside the agreed scheme. Yet there is here another point to make. When the Belarusian side noticed that Uralkali was trading potash not through the Belarusian Potash Company but on its own (in violation of the agreement), Minsk did not resort to legal measures. Instead, it decided to break the agreement itself. Post-Soviet business is still not about law; it is about force and might.

Kerimov’s team insist that Uralkali recently left the agreement on selling potash through the BKK because of Lukashenka’s decision to revoke Belaruskali’s monopoly. Uralkali’s move caused a kind of earthquake for the entire branch, and with its market capitalisation fell by $20bn, prices plunged. The Russian Izvestia daily compared the situation with “Saudi Arabia deciding to leave OPEC.”

Uralkali is the only world's potash producer which can survive such fallRead more

In this way, through Uralkali Kerimov was given a clear opportunity to build up his potash empire further. As the Russian media proudly noted, Uralkali is the world’s only potash producer which could survive such a fall. For Uralkali, production costs are only $62 a tonne while for Belaruskali they are about twice higher, and for other North American and European companies production costs are $100-200 a tonne. Under these conditions, Kerimov has a chance to buy not only Belaruskali, but begin to seek further acquistions as well. The Belarusian potash company, however, has been hit especially hard – its market capitalisation fell by 60-80 percent, while the same losses of Uralkali amounted only to 20-30 percent.

Whom to Blame for the Uralkali Affair in Belarus?

Essentially, Uralkali has pursued its own natural interests in this story, yet such an undermining of Belaruskali’s position in order to buy it have hardly any relation to civilised free market rules. Moreover, the behaviour of Russian side would be punishable in most Western countries as a combination of wide-scale fraud, abuse of office, and fraud.

The Belarusian government has blamed Russian business practices, Kerimov and his managers. State media recalled the wild years of Russian capitalism in the 1990s when criminal businessmen bought up even strategic enterprises for a nickel after undermining their positions and putting their own people into the administration. Yet state journalists were silent when it came to discussing the people who let Kerimov’s team conduct business in Belarus for years and nearly took away the most profitable of Belarus’ national corporations.

The current Belarusian head of state should be the first to explain how this was all possible as he has personally decided Belaruskali’s fate for all these years. He brought Belaruskali (then 35 per cent of the global market) into an alliance with the then much smaller Uralkali (then 13 per cent of global market) in 2005.

The consequence was not the expansion of Belaruskali into Russia, but the threat of Belarusian potash being stolen through dubious manipulations. In addition, the Belarusian government did not invest anything into the training of its own specialists to sell potash if something went wrong in their cooperation with the Russians, and undertook next to no measures to establish its own trading network.

At the moment, we can only guess how adventurous the policies of the Belarusian government have become in recent years from anecdotes leaked to the media. For example, how top Belarusian officials celebrate their meetings with “serious investors” from firms worth $20,000. The non-transparent nature of the Belarusian state ensures that decisions of even a national dimension are taken according to the will of a handful of insiders and hardly any outsider can calculate their consequences.

Such affairs show the failure of the current regime not only to develop the country but even to ensure that national assets remain intact. The Uralkali affair is the biggest indicator of this phenomenon, but it is definitely not the only one.

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30 August 2013

External and Domestic Shocks – Digest of Belarusian Economy

In July, GDP growth somehow gained momentum, but was still very modest and difficult to place confidence in. Shrinking external demand is one of the core problems for the national economy, although the authorities attempt to compensate these losses of output through stimulating domestic demand.

But this mixture of policies is becoming more and more dangerous, as it leads to a rapidly growing external deficit that is unsustainable due to the absence of resources to maintain its financing. The result has been a surge in pressure in the foreign exchange market.

The authorities are afraid of making macroeconomic adjustment based on exchange rates as it may provoke a new wave of uncontrolled inflation-depreciation.

In July, they resorted to a number of monetary mechanisms to halt any major fluctuations and maintain a fragile equilibrium. From a short-term view, they have succeeded, but from a medium-term view, the problem has been postponed rather than solved.

GDP constantly growing

The Belarusian Statistical Committee Belstat reported that GDP growth rate in January-July was 1.4% year-on-year, i.e. it remained constant in comparison to the first half of 2013. According to our estimations, it means that in July the growth rate was somehow stronger when compared to April, May, and June. Growth, however, remains rather modest.

From the supply side, only a handful of industries displayed a growth in their output, and correspondingly, contributed to GDP growth positively: both the retailers and wholesale traders saw gains, as did construction. Other key industries of the economy – manufacturing, transport, communications, and agriculture – were still in recession.

On the demand side, household consumption still retained its position as a leading contributor to GDP growth. This was due to a perserved growth rate of real wages. For instance the growth of real wages (on a seasonally adjusted basis) in the 2nd quarter with respect to the 1st quarter amounted to 4.6%.

The intention of the government to maintain this growth is disturbing, because there are no sound reasons for it. Consider the fact that the return of a previous long-term trend after the crisis of 2011 has already occurred, which means that the further growth of the cost of a unit of labour will result in either a lower level of competitiveness and profitability of firms, or further monetary inflation pressure, or perhaps both.

In July, a sudden jump in the growth rate of capital investments took place: it grew by 18.4% year-on-year, which followed a relatively modest growth of 6.7% year-on-year in the second quarter. In a sense, July might be seen as a turning point in the government’s policy: having exhausted the potential for stimulating GDP growth based on real wages, it is likely to reorient itself to stimulating output through capital investments. To succeed it needs a space to manoeuvre in both its external and financial sectors. But the problem is that there are plenty of obstacles in both these areas.

The balance of internal trade deteriorates

The balance of the foreign trade of merchandise deteriorated during the first half of 2013 and by the end of the same period with the trade deficit amounting to 1.7bn USD against the surplus of 1.9bn USD in the first half of 2012. Roughly a third of this trade balance deterioration is due to the impact of thinners and solvents schemes (which, thanks to them, exports flourished in the first half of 2012).

However, the deterioration of trade in other areas is of much more of concern, as the complete halt of thinners and solvents exports was only a single adverse shock to the economy, while the latter might be a long-lasting development and it is much harder to neutralise its impact on the economy.

Apart from the issues surrounding thinners and solvents, a number of additional reasons explain the deteriorating trading environment. First, Belarus has lost a substantial number of its advantages in price competitiveness that were inherited from the currency crisis of 2011: by the end of the first half of 2013 the real exchange rate appreciated by 53.7% in comparison to its low point in August 2011.

This means Belarusian producers became less competitive both in domestic and external markets.

Second, growth prospects in other countries, even with its trading partners (Russia first and foremost) worsened, which led to a contraction in the demand for Belarusian goods. Third, global trends aggravated trade conditions (i.e. the relationship between exports and imports prices) for Belarus. Fourth, domestic expansionary policy led to higher demand for imports by firms and households.

As the table demonstrates the first half of 2013, roughly all groups of commodities displayed a reverse trend in the direction of exports and imports in real terms on year-on-year basis (except energy goods). In other words, exports fell, while imports grew.

New loans or macroeconomic adjustment?

Given this pitiable external environment, the government is expected either to resort to securing new external loans, or to carry out a macroeconomic adjustment.

The problem with this is that not only are there hardly any available or affordable sources from which they could secure loans, the authorities are also reluctant to carry out any macroeconomic adjustment. Currently the government has resorted to its only alternative – spending its international reserves – but this option is of limited usage, whether one considers it from the perspective of the how long it can be done and the value of its reserves, or from the perspective of how dangerous the issue of credibility of such an economic policy is.

In late July and August, a new external shock occurred. The Russian producer of potash fertilisers Uralkali decided to abandon an agreement with Belaruskali on joint sales. The coordination of their sales policy enabled the companies to be the main players in the global potash market and affect the dynamics of world prices. However, Uralkali stated that it would be going to change its strategy and would resort to the strategy of maximising its output.

If this is the case, global prices will definitely go down, but the scope of such a decrease is questionable. The most radical scenario assumes a double reduction in global prices. For Belarus, this scenario will lead to a loss of export revenues of about 1.5bn USD, i.e. an increase of the trade deficit by roughly 2% of GDP.

Financial Dollarisation

Given the drastic deterioration of the external environment surrounding the economy, one would expect the authorities to carry out macroeconomic adjustment. An adjustment based on exchange rates seems to be the most natural and least painful in this case. In July, there were some signs of readiness on the part of the authorities to this approach and the nominal exchange rates began to depreciate.

However, soon thereafter the authorities decided to prevent a rapid exchange rate adjustment, because many households began to withdraw their deposits in their national currency and convert them into hard currency. This problem is a chronic one for Belarus and many households traditionally react through deposit dollarisation (i.e. change their deposits from the national currency to a foreign currency) to even small fluctuations of the exchange rates, which causes further fluctuations in the financial markets.

Ultimately, financial dollarisation hints at a problem of a higher order – the lack of credibility of the government’s monetary policy (and its economic policy as a whole). However, the authorities lack the capacity to battle with this fundamental problem and have to struggle against a ‘symptom of decline’, i.e. deposit dollarisation.

Hence, they use the instruments of monetary policy in order to maintain fragile stability at the foreign exchange market. In July, monetary policy authorities reduced their money supply and facilitated a liquidity shortage in the money market. A jump in interest rates in the national currency was the main outcome of this policy, which ultimately stopped the outflow of deposits in the national currency from banks and mitigated the pressure in the foreign exchange market.

These actions, however, seem to be effective in postponing the problem, rather than solving it, as this volatile mixture of policies has nothing to do the progressively growing external trade deficits.